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– From 1 April 2013 the minimum employee and employer contribution rate will rise from 2% to 3%.

– From 1 April 2012 the tax-free status of employer contributions to KiwiSaver and other complying superannuation funds will end. All employer contributions will be subject to Employer Superannuation Contribution Tax (ESCT) paid at the employee’s marginal tax rate.  This means that while the gross amount of employer contributions is increasing by 50% in 2013, it may not result in a significant amount actually being credited to your Kiwisaver account.  If you are a top marginal rate taxpayer there will be no net increase to the overall level of employer contribution.

- From the year ending 30 June 2012 the Member Tax Credit rate will be halved from $1 to 50c for every $1 contributed by members, and will be capped at $521 a year.  This is half the current maximum.

– The $1,000 kick start remains unchanged.

Because these changes are staggered over three years the amount that goes into KiwiSaver accounts in 2012 is, in fact, likely to decrease (as a result of the increase in ESCT and the decrease in the Member Tax Credit).

The real losers from this round of KiwiSaver changes are the self-employed and those workers on the top marginal rate. These are people who do not benefit from the increase in employer contributions.

User pays for KiwiSaver?

These changes are not designed to result in a material change to the overall level of contributions made into an individual’s KiwiSaver account.  The reduction in Government subsidy and the increase in ESCT is effectively being offset by the increase in contributions from employers and employees.  In fact, these changes will result in an improvement to the aggregate amount of national savings (through a reduction in the expenditure burden imposed on Government). 

While in the short term part of this additional cost will be borne by employers; over the medium and long term all of the additional cost will ultimately be passed on to employees.  The speed at which this takes place will, in large part, depend on the flexibility contained in an individual’s employment contract terms and whether the employee is a wage-price taker or a wage-price setter. 

An employer under a collective contract (or who is paying the minimum wage) is likely to shoulder more of these additional costs for longer than they would if their employees had wage increases set by the market every year.  Thus, high and middle income NZ workers are likely to find the additional costs of KiwiSaver factored into future wage increases reasonably quickly.

Impact on others

Aside from those who are required to make additional payments into KiwiSaver, there will be others who are affected by these changes.  Financial advisers and fund providers will need to be educated on the latest changes so that they can explain them to their clients and address inaccuracies in their offer documents.  Employers will also need to come up to speed with the changes and make necessary adjustments to payroll and employment contracts.


It is unclear whether shifting the cost of KiwiSaver from the public to the private sector will have any impact on the overall level of domestic savings.

In practice, the factors affecting savings behaviour have proved elusive and difficult for Governments to manipulate.  The Government itself admits that the recent dramatic changes to the rates of household saving are not the result of any Government policy and had begun to take effect well before the increase in the rate of GST. 

Many economists are sceptical about the efficacy of Government sponsored private superannuation schemes:

– Making savings compulsory does not necessarily result in an overall increase in the levels of saving.  People can simply borrow if they wish to continue spending. Indeed, following the introduction of compulsory superannuation in Australia (in 1992) the level of household saving continued to drop for another 15 years. 

– Similarly incentivising (or subsidising) savings behaviour can produce anomalies – it can make it sensible to put money into KiwiSaver while running up an equivalent amount of debt on your credit card.

The real determinant of savings behaviour is not how wealthy you are or will become but how wealthy you feel.  Economists point to factors such as access to credit (including interest rates), levels of overall confidence in future economic growth and (the somewhat oddly termed) “wealth effects”: i.e. increases in overall net wealth that are not taken into account in assessing levels of net household debt (e.g. house prices).  Essentially the poorer you feel the more you save – given these changes to KiwiSaver will ultimately make people feel poorer they could actually (and somewhat counter-intuitively) make them save more.

Whose saving?

It is true that these changes will help the Government save.  We are constantly being reminded that the Government is required to borrow around $300 million a week just to pay its bills.  This means that, in one sense, every Government programme is being paid for with “borrowed money”. 

The Government says that it shouldn’t be borrowing to allow you to save.  After all, as a country, we are not really “saving” anything if we invest money that has been borrowed from someone else. 

The logic of this argument only goes so far.  The money that goes into subsidising KiwiSaver is borrowed by the Government (at Government rates).  That money is then invested privately at (what should be, over the long haul) a better rate of return than you would get investing in Government bonds.  Borrowing to invest is economically rational provided the expected return exceeds the costs of borrowing.  This is presumably part of the reason why we have not wound up the Government Superannuation Fund. 

KiwiSaver subsidies have the further advantage of giving taxpayers ownership and control of their retirement savings rather than leaving them in the hands of Government.  Subsidies for private superannuation do raise issues of inter-generational equity but such issues are not unique to KiwiSaver. Spending on infrastructure, for example, raises a similar issue (but the opposite problem). 

It’s not what we’re saving; it’s how we’re saving

One of the favourite pastimes enjoyed by economists is criticising New Zealand’s savings record. 

It is true that our level of household savings is quite poor, but, at a national level, our household borrowing has, over the last decade, been offset by the relatively high-level of Government savings. 

An over-leveraged household sector is not unique to New Zealand (our level of household debt is, by some measures, on par with both Australia and the UK). 

Much of New Zealand’s household borrowing has been put into housing.  At an individual level, property has held up reasonably well as an investment over the last 10 years.  One NZ Treasury report issued at the end of 2009 indicated that, once increases in house values were taken into account, New Zealanders’ net wealth increased by an average of 16% p.a. through the middle of the last decade. 

But New Zealand’s love affair with property is a different story at a national level.  By borrowing money to buy houses New Zealanders have driven asset prices beyond their fundamentals and have pumped large amounts of money into a non-productive, non-tradable sector of the economy.  Households are very exposed to the housing market and (therefore) the performance of the NZ economy as a whole.  Evidence of that vulnerability can be seen in the strong correlation between consumer behaviour and house prices.  NZ consumers dramatically curtailed their spending when the domestic housing market dropped a couple of points. 

The real way to address our unhealthy addiction to real property would be to address the underlying tax incentives in property investment but, given no Government in living memory has had the political courage to address that problem, at least one positive consequence of the KiwiSaver subsidy has been that it incentivises New Zealanders to put their money into something other than the family home.

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